What is Chapter 13?

Chapter 13 bankruptcy differs from Chapter 7 first and foremost in that the debtor gets to keep all of his property (ie remain a Debtor-In-Possession). The heart of Chapter 13 is a payment plan through which the debtor will pay back some or all of the debts over a period of time from his income.

With the new laws, Chapter 13 is the only available option for certain debtors. Others may still be able to choose between Chapter 7 and Chapter 13. The determination of which chapter applies and whether the debtor can make a choice (the dreaded Means Test) is something your attorney will take you through.

Chapter 13 also requires that secured debts (houses, cars) do not exceed $922,975 while unsecured debts (credit cards, etc.) must be under $307,675.

Before a Chapter 13 case is filed, as with Chapter 7, the debtor must undergo credit counseling from an approved agency. There is a small fee (around $50) for fulfill this requirement, and this fee may be waived for those unable to pay. You will receive a certificate of completing from the counseling agency, and this certificate is required before a bankruptcy filing is accepted by the court.

The filing itself is a complicated maze of 30-40+ pages of questions relating to income, expenses, gifts, past or present businesses, lawsuits, prior bankruptcies, real property, bank accounts, debts and how those debts may be repaid. Along with this packet, the debtor must submit tax returns from the prior year and proof that tax returns have been filed during years further past. A filing fee of $274 is required, and this is payable directly to the court.

The Plan

At the heart of the Chapter 13 case is "The Plan," which is a part of the lengthy filing described above. The plan describes in detail how the debts will be repaid, over what period of time, and which debts will be discharged after the plan period completes.

Certain debts must be repaid in full. These include child support, alimony, taxes, and a few others, and these get "priority" in the repayment scheme. Morever, the plan must completely repay any defauls or arrears on secured debts, such as your home or car. Your attorney will figure out exactly how to allocate the payment when your plan is being drafted.

Any money remaining after living expenses, priority debts, and secured debts must go to repay the unsecured debts, which are generally the largest consumer debts and include credit cards, medical bills, etc.

The plan will last either 3 or 5 years, another issue decided by the Means Test and by how your income relates to certain state averages. Some higher income debtors will be required to do a 5 year plan while others will be able to do 3 years. Of course, the plan will end before the 3 or 5 year mark if all debts have been repaid in full.

The debtor must begin making payments under the Chapter 13 Plan within 30 days after filing it with the bankruptcy court. Payments are made directly to the bankruptcy trustee, who is a court appointed official overseeing the case. Once the plan is approved and confirmed, the trustee will begin to distribute some of the money to your creditors, while keeping an "administrative fee" for himself.

For those with regular jobs, payments may be automatically withheld from the paychecks and forwarded to the Trustee directly.

How Much You Must Pay

The plan may be modified for a good reason, such as loss of job or disability. In that event, the plan may be extended, payments may be reduced, or certain debts may be discharged sooner. The debtor also has the option of converting the case to Chapter 7.

If there is a change in circumstances during the period of a Chapter 13 case, the plan may need to be reevaluated and modified accordingly. If the change is for the worse, it may be possible to temporarily suspend plan payments to give the debtor some breathing room. In the alternative, it may be possible to further lower the plan payments, either for a certain number of months or for the remaining life of the plan. If the plan is shorter than five years, it may be possible to extend the plan to a five-year plan, but no Chapter 13 plan may exceed the five year duration.

If regardless of modifications the Debtor is still unable to make plan payments, the law allows the Debtor to ask the court for an early discharge due to hardship. There are specific requirements that must be met for the court to consider this request, and the court has the power to grant or deny it.

If the request for a hardship discharge has been denied or all the requirements for a hardship discharge were not met, the Debtor could choose to convert the case to a Chapter 7 proceeding. This is the Debtor's absolute right for which no permission is necessary. The only exceptions are if the Debtor has already received a bankruptcy discharge withing a certain amount of time in the past, or if the current case has already been converted.

Finally, the Debtor may ask the court to completely dismiss the Chapter 13 case. This would end the protection of the bankruptcy laws and allow the creditors to swarm back in and pursue collections again. While the Debtor would receive credit for any payments that were distributed to creditors during the Chapter 13 case, creditors could then once again add interest retroactively, file lawsuits, place liens or repossess property, and garnish wages.

The Conclusion of a Chapter 13 Case

Once all the payments have been made, the Debtor would request that the court enter an order of discharge. The Trustee would need to certify how the payments were collected and distributed. The Debtor would need to produce evidence of completion of the second credit counseling course (the Personal Financial Management course), and that all child support and alimony obligations - if any - are current. Upon review of these requirements, the court would enter the discharge, concluding the Chapter 13 case.